1. Calculate Cove’s new break-even point under each of the following independent scenarios: a. Sales price increases by $1.60 per cake. b. Fixed costs increase by $505 per month. c. Variable costs decrease by $0.29 per cake. d. Sales price decreases by $0.70 per cake. 2. Assume that Cove sold 460 cakes last month. Calculate the company’s degree of operating leverage. 3. Using the degree of operating leverage, calculate the change in profit caused by a 7 percent increase in sales revenue.

                                                                            Break-even point

a. Sales price increases by $1.60 per cake.          395 units

b. Fixed costs increase by $505 per month.       512 units

c. Variable costs decrease by $0.29 per cake.    447 units

d. Sales price decreases by $0.70 per cake.        495 units

2. Assume that Cove sold 460 cakes last month. Calculate the company’s degree of operating leverage.

Operating Leverage = 0

3. Using the degree of operating leverage, calculate the change in profit caused by a 7 percent increase in sales revenue.

Profit = $113.34

Explanation:

Total Variable cost = $2.28 + $1.02 + $0.22 = $3.52

Contribution = $13.31 - $3.52 = $9.79

Break-even Point = Fixed cost / contribution per unit = $4,503.40 / $9.79 =

Break-even Point = 460 units

a. Sales price increases by $1.60 per cake.

Selling Price = $13.31 + $1.60 = $14.91

Contribution = $14.91 - $3.52 = $11.39

Break-even Point = Fixed cost / contribution per unit = $4,503.40 / $11.39 =

Break-even Point = 395.38 units = 395 units

b. Fixed costs increase by $505 per month.

Fixed Cost = $4,503.40 + $505 = $5,008.4

Contribution = $13.31 - $3.52 = $9.79

Break-even Point = Fixed cost / contribution per unit = $5,008.40 / $9.79 =

Break-even Point = 511.58 units = 512 units

c. Variable costs decrease by $0.29 per cake.

Variable cost = $3.52 - $0.29 = $3.23

Contribution = $13.31 - $3.23 = $10.08

Break-even Point = Fixed cost / contribution per unit = $4,503.40 / $10.08 =

Break-even Point = 446.77 units = 447 units

d. Sales price decreases by $0.70 per cake.

Selling Price = $13.31 - 0.70 = $12.61

Contribution = $12.61 - $3.52 = $9.09

Break-even Point = Fixed cost / contribution per unit = $4,503.40 / $9.09 =

Break-even Point = 495.42 units = 495 units

2. Assume that Cove sold 460 cakes last month. Calculate the company’s degree of operating leverage.

Total sales = 460 x 13.31 = $6,122.6

Total Variable Cost = 460 x 3.52 = $1,619.2

Total Contribution = $6,122.6 - $1,619.2 = 4503.40

Net income = $4503.40 - $4503.40 = 0

Operating Leverage = 4503.40 / 0 = 0

3. Using the degree of operating leverage, calculate the change in profit caused by a 7 percent increase in sales revenue.

Sales = 460 x 107% = 492.2 units

Profit = 0+ ((492.2 - 460) x 3.52) = $113.34

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